Family Assistance, Social Security and Veterans' Affairs Legislation Amendment (2005 Budget and Other Measures) Bill 2006

Bills Digest no. 104 2005–06

Family Assistance, Social Security and Veterans' Affairs
Legislation Amendment (2005 Budget and Other Measures) Bill
2006

WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.

This initiative was announced in the 2005-06
Budget.(1) The government claims the purpose of raising
the FTB-A income test free area threshold is to help low income
families earn more money. The threshold increase is a part of the
Welfare to Work initiatives announced in the 2005-06 Budget and is
designed to address the barriers faced by families in attempting to
increase their earnings from employment and at the same time seeing
decreases in government assistance and having to pay more
tax.(2)

The government estimates this threshold increase will cost $1.1
billion over four years and this is made up of $0.9 million in
2005-06, $364 million in 2006-07, $371.7 million in 2007-08 and
$378.9 million in 2008-09.(3)

The FTB income supplement payments for families with dependent
children (FTB-A and FTB-B) were introduced from 1 July 2000, as the
then new income supplement payments for families with children.
They were introduced as a part of the A New Tax System (ANTS)
changes.(4) FTB-A and FTB-B replaced a range of income
supplement and tax assistance arrangements for families, being
Family Allowance, Family Tax Payment Parts A and B, Family Tax
Assistance Parts A and B, Guardian Allowance, the Dependant Spouse
Tax Rebate and the Sole Parent Tax Rebate.

The FTB-A income test looks at the adjusted taxable income of
the family and where income is below upper cut-off limits (see
Table 2 below), either a part-rate or a full rate of FTB-A can be
paid. The rate of FTB-A is dependent on the level of family income
and how many qualifying children the family has and the ages of the
children.

The FTB-A income test has a free area. This is the amount of
annual income a family can have before the maximum FTB-A rate is
reduced. Currently, for the 2005-06 year the FTB-A income test free
area is $33 361.

FTB-A stays at that base rate until family income reaches $86
213 a year (plus $3 431 for each child after the first). Thereafter
the FTB-A base rate is reduced by 30 cents for every dollar over
that amount until payment reaches nil (see Table 2 below).

For the 2005-06 financial year the FTB income test free area is
$33 361 per annum. This proposal is to increase this free area to
$37 500 per annum to take effect from 1 July 2006 and so will
therefore apply to the 2006-07 year. This one-off increase to the
free area is higher than if the normal annual indexation of the
income test free area to the Consumer Price Index (CPI) had taken
place. The Explanatory Memorandum states that if the CPI indexation
had taken place this would have seen the free area increase to a
projected $34 310 for the 2006-07 year.(6) This higher
FTB-A income test free area will thereafter continue to be indexed
to movements in the CPI see below.

Currently the FTB-A income test free area is indexed to
movements in the CPI once a year (1 July).(7) The
indexation is to CPI increase in the 12 month period ending on the
preceding December. This Bill does not make any changes to this
indexation arrangement and therefore the new higher free area will
also continue to be indexed annually to the CPI.

The FTB payments (FTB-A and FTB-B) have seen substantive
adjustments to their income testing arrangements since they were
introduced in July 2000, as a part of the ANTS package of
initiatives.(8) For FTB-A the major change was the
reduction in the FTB-A income test taper rate from 30 per cent down
to 20 per cent, announced in the 2004-05 Budget, that took effect
from the 2004-05 year.(9) The biggest single adjustment
to the FTB-B was announced in the 2004-05 Budget, in which the
FTB-B income test free area was doubled to $4 000 a year and the
income test taper rate was reduced from 30 per cent down to 20 per
cent.(10)

It is no coincidence this proposed one-off increase in the FTB-A
income test free area was announced in the 2005-06 Budget,
complementing the Welfare to Work initiatives also announced in the
Budget.(11) The government is concerned that if it is
asking FTB recipients to work more, to be more self-supporting,
they should remove or reduce some of the financial disincentives to
earning more from employment. This refers to the high effective
marginal tax rates (EMTR) faced by FTB recipients as they commence
to work, or work more hours, earning increasing levels of income
and at the same time government assistance is removed and they are
required to pay more tax.(12) The National Centre for
Social and Economic Modelling (NATSEM) studies indicate that for
some, after government financial assistance is withdrawn and more
tax paid, a person, can be left with only 20 or 30 cents in their
hand for each extra dollar earned.(13)

The current FTB-A
recipient mix and income testing

The table below shows the number of customers in receipt of FTB
Part A for each of the financial years 2001-02 to 2004-05 by rate
of payment.(14)

The reduction in the numbers on the maximum rate mirrors the
overall reduction in the numbers on working age income support
payments like Newstart Allowance over the same period. This
reflects the reduced numbers of unemployed and increased employment
participation rates. It also reflects the fact that the rate and
income test limits for FTB-A are indexed once a year to the CPI,
whilst average weekly earnings (AWE) have been increasing at a
greater rate over the period and so less persons are entitled to
the maximum rate because their incomes have increased.

The numbers on the broken rate have increased by over 100 000
in the period 2001-02 to 2004-05, especially in the last year. The
decline to the 2003-04 year reflects increased earnings by FTB-A
recipients. The last year increase reflects the reduction in the
FTB-A income test taper rate from 30 per cent down to 20 per cent,
announced in the 2004-05 Budget, that took effect from the 2004-05
year.(15)

The numbers on the basic rate was increasing in the first three
years reflecting the CPI and AWE relationship described above. The
sharp drop in the 2004-05 year reflects the reduced taper rate to
20 per cent allowing more on to the broken rate.

The proposed increase in the FTB-A income test free area will
mainly see families who qualify for a broken rate of FTB-A receive
an increase in assistance. This is because the raising of the free
area will see a greater amount of their income being disregarded.
For those families on maximum rate FTB-A (as their income is below
the free area), the raising of the free area does not provide any
immediate increase in assistance. There is the potential for
families on maximum rate to benefit if they earn more income and
their income exceeds the free area limit. These families will be
able to earn more income and still receive maximum rate FTB-A and
will also be able to receive more income before they reach the
level where they are only entitled to the basic rate. The
government claims around 400 000 families will get an average $24 a
fortnight boost to their rate of FTB-A.(16)

The legislative amendments presented in Schedule 2 propose to
allow the use of an estimate of a claimant s adjusted taxable
income that has been indexed to average weekly earnings (AWE). This
income estimate could then be used to determine a rate of FTB-A,
FTB-B or CCB.

This initiative was announced in the 2005-06 Budget and is
estimated to cost $18.6 million over four years made up of $3.5
million in 2005-06, $10.2 million in 2006-07, $2.9 million in
2007-08 and $1.7 million in 2008-09.(17) It is
anticipated to reduce the level of overpayments by $115.2 million
over four years.(18) The cost of $18.6 million over four
years is entirely in administrative costs and assumes the
initiative does not result in any change in the net level of
assistance provided to FTB or CCB recipients. The peak cost year is
in 2006-07, being the first full year the initiative will be used.
The projected savings of $115.2 million over four years will be
realised through more accurate payments of FTB and CCB to
recipients and therefore less overpayments and so less debts to be
raised and recovered.

FTB can be paid in two ways. One, by way of fortnightly payments
during the year with the payment rate based on the claimant s
estimate of their income for that year. Secondly, FTB can also be
paid at the end of the year by claiming in the tax return and the
amount paid is based on the actual adjusted taxable income for the
year past. Obviously the second method does not require an income
estimate as the year has passed and the actual adjusted taxable
income is known. The fortnightly instalments payment method
requires the claimant to make an estimate of their income for the
coming year.

The majority (95 per cent) of FTB-A recipients take their
payments fortnightly during the year. The table below shows the
number of families receiving fortnightly instalment FTB-A as at 28
May 2004 and ATO lump sum FTB-A payment for 2002-03 as at 28 May
2004.(19)

Age ofFTBAchildren

Number of families receiving fortnightly
instalmentFTBAas at28 May 2004*

Number of families who received FTB A through ATO lump sum
for 2002-03 as at 28 May 2004*

0-5

866 917

31
212

6-12

979 026

44
257

13-15

505 437

27
007

16-18

190 535

21
900

19-21

51
131

5
732

22

2
445

369

23

995

172

24

346

70

Total

1 806 157*

92 876*

Note: *The customer count is the number of customers with at
least one child in that age group, thus a single customer may be
counted in more than one category. However, the total number of
customers counts each customer once only.

CCB can be paid in two ways. One, the claimant can claim CCB as
a lump-sum payment at the end of the year in their tax return (as
per FTB) and the amount paid is based on the actual adjusted
taxable income for the year past. Secondly, the claimant can claim
the CCB to be provided during the year and this is done by way of
reduced fees charged by the child care provider. The reduced child
care fee method of receiving CCB requires the claimant to make an
estimate of their income for the coming year. Based on this income
estimate a CCB rate assessment is made and the entitlement is
advised to the child care provider by Centrelink and the provider
reduces their fee by that amount.

At present, as outlined in the Explanatory Memorandum, estimates
of income are only provided by the claimant.(20) There
isn t the legal capacity for the Secretary to provide an income
estimate. Estimates by claimants are often not updated from
year-to-year and are inherintly conservative. Conservative, as a
lower estimate can realise a higher rate of FTB or CCB during the
coming year. The amendments in this Schedule of the Bill will
empower the Secretary to apply an income estimate, based on the
previous years actual income indexed to AWE. This should see lesser
number of overpayments, debts raised and cost savings. The cost
savings will be in the administrative cost of processing debts and
chasing repayments and also in the number of debts that are never
recovered.

FTB-B is paid to a sole parent or to the lowest income earner of
a partnered couple. The income test for FTB-B is based on only the
claimant s income, so for a sole parent it regards the sole parent
s income. For partnered couples, the FTB-B income test is based on
the lowest income earner of couple and the highest income earner s
income is disregarded.

Amendments were made to the application of the FTB-B income test
with the passage of the Family and Community Services
Legislation Amendment (Family Assistance and Related Measures) Act
2005.(21) Normally, the FTB income test (both for
FTB-A and FTB-B) looks at the annual income of the claimant to set
an annual rate of entitlement. The passage of the amendments to the
Family Assistance Act 1999 (FAA) in 2005 addressed the
situation where a parent who would face the prospect of a FTB debt
if they returned to the workforce part way through a financial
year. As said above, FTB-B eligibility is assessed on an annual
basis in line with an estimate of income made at the start of the
financial year. Commencing paid employment part way though a year
can mean that eligibility for FTB-B for the whole year is lost or
at least that entitlement is reduced. Any payments already received
can become an overpayment and then a debt.

The 2005 changes ensured that the parent returning to work
retains eligibility for FTB-B for the part of the financial year
before they return to work. Their income will only reduce
entitlement for the period after they return to work. The changes
significantly reduced the return to work disincentives faced by
parents in this situation.

Schedule 3 proposes to amend the definition of returns to work
in the FAA so that persons who have a child and take paid leave,
then return to work, then take unpaid leave, then return to work
for a second time should not gain the benefit of being entitled to
FTB-B up until they start work for the second time.

Debts can commonly arise where payment of CCB is based on an
estimate of annual income and the estimate understates the level of
income actually received during the year. Once the assessment of
tax is done at the end of the year and the actual adjusted taxable
income for the year known, if too much CCB was paid based on the
income estimate, then the excess payment is an overpayment and a
debt.

The government announced in the 2005-06 Budget the proposal to
tap into FTB reconciliation top-up payments and tax refunds to
clear CCB debts.(22) Under the current FAA legislation,
tax refunds and end-of-year top-up payments cannot be drawn upon to
offset CCB debts arising from previous year. At present only FTB
debts owing from previous years can be offset using tax refunds and
end-of-year top-up payments.

It is estimated this measure will reduce debts by $47.1 million
over four years and cost an extra $4.7 million to administer over
four years made up of $2.8 million in 2005-06, $1.1 million in
2006-07, $0.4 million in 2007-08 and $0.4 million in
$2008-09.(23)

The Explanatory Memorandum provides a succinct background to the
purpose of the proposed amendments in Schedule 5.(24)
There is no limit on long day care places that can receive
government funding assistance by way of CCB paid to a parent, as
long as compliance with State/Territory and local government
requirements are met. Some other forms of child care services, that
can attract a government subsidy by way of payment of CCB, are
subject to Government control, as the expenditure for these places
is set in the Budget context. So unless there is an allocated child
care place to the service provider, the place can not attract the
CCB payment subsidy. Services subject to this approved place
funding refer to:

family day care services,

in-home services,

occasional care services, and

outside school hours care services.

The origins of the need for government approved places for these
types of services lie with governments wanting to keep control of
cost.

The number of approved places allocated to an individual service
provider for these types of services is usually based on use and
demand in the past. However, as explained in the Explanatory
Memorandum(25) demand and take-up can vary and the
proposed changes in this Schedule are designed to provide greater
flexibility to respond to changes in demand and use by allowing
approvals for unused places to be transferred to other providers
with excess demand.

Carer Allowance (CA) is an income supplement payment provided to
a person providing care to a child or an adult at home. The person
being cared for must meet minimum disability requirements so that
the care requirements are substantive. There are two main types of
CA payments; CA - caring for a child and CA caring for an adult. It
is tax free and income and assets test free and the current rate is
$94.70 per fortnight.

Currently, the commencement date for the start of payment for CA
caring for a child can be backdated for up to 52 weeks prior to the
date of claim. Likewise, the commencement date for the start of
payment for CA caring for an adult can be backdated for up to 26
weeks prior to the date of claim. The proposal in Schedule 6 of the
Bill is to amend the Social Security Act 1991 (SSA) to
reduce the commencement date for the start of payments to 12 weeks
prior to the date of claim for both CA caring for a child and also
for CA caring for an adult.

CA caring for a child has its origins in the Handicapped Child
Allowance (HCA) introduced in December 1973. HCA was introduced as
a financial support to carers of a child with substantial care
requirements who were caring at home. It was at a time when
increasing numbers of parents were caring for children with
substantial disabilities at home rather than having the child
placed in an institution. HCA was replaced by the Child Disability
Allowance (CDA) from November 1987. The CDA payment was
subsequently replaced by the CA - caring for a child in the 1997-98
Budget as a part of the Carer Package.(26)

At the same time as CA replaced CDA in the 1997 Carer Package,
there was also the replacement of the Domiciliary Nursing Care
Benefit (DNCB) program with CA caring for an adult.(27)
DNCB was a government income supplement payment to a person caring
for a frail aged person with a disability who required a sufficient
level of care that would otherwise see them qualifying for nursing
home admission.

The government first announced an intention to reduce the
backdating of the start date of payment for CA (or CDA as it was
then called) in the in the 1996-97 Budget.(28) The
initiative was to reduce the backdating period from 12 months down
to 3 months. This initiatve was not subsequently passed by the
Parliament. The second attempt was in the Carer Package presented
in the 1997-98 Budget, where the proposal was to limit the
backdating of the start date of payment to 6 months prior to the
lodgement of the claim.(29) Likewise, notwithstanding
the substantive initiatives in the Carer Package were agreed to by
the Parliament, the backdating section of the Carer Package for the
new CA caring for a child was not passed by the Senate. The CA
caring for a child backdating provisions remained at up to 12
months and the new CA caring for an adult were set at up to 6
months.

For the predecessors of the CA caring for a child, being the HCA
and the CDA, there have been backdating provisions of 12 months
since they were introduced. Why? The main justification concerns
very young and/or newly born children where it may take a
substantive period of time to actually realise and diagnose that
the child has a disability. Equally it may take some time to
differentiate between the extensive care requirements for a very
young child as opposed to the care requirements arising from the
child s disability. For some disabilities (like autism), it may
take a substantive period to diagnose the child s condition and the
extent of the severity of the condition and to then develop, and
understand the impact of the condition on the child and then
therefore their care requirements. Likewise, some conditions, while
they may be diagnosed at an early stage, their manifestation in the
child varies tremendously between individuals and it may take some
time to establish what the impact is. This especially applies for
very young children.

The backdating provisions also provided some relief to claimants
who did not lodge their claim in a timely manner. When providing
care to a child with a substantial disability mainfesting in
substantial care requirements, a claim for HCA/CDA/CA was not
always in the forefront of the parent s mind. Awareness of the
existence of the HCA/CDA/CA was not extensive and claims were often
delayed due to lack of knowledge of the existence of the
payment.

The government announced in the 2003-04 Budget the proposal to
reduce the period for which persons could be paid an income support
or income supplement payment while overseas from 26 weeks down to
13 weeks. This was given effect with the passage of the Family
and Community Services and Veterans' Affairs Legislation Amendment
(2003 Budget and Other Measures) Act 2003.(30)

In some circumstances, section 1218C of the SSA allows for the
discretionary payment for more than 13 weeks.(31) This
might occur where a person is prevented from returning to Australia
before the end of the portability period, for one of the reasons
specified in section 1218C of the SSA. For example if the person or
a family member of the person is:

involved in a serious accident,

seriously ill,

hospitalised, or

the victim of a robbery or serious crime.

Or if the person is:

involved in custody proceedings,

required to remain overseas in connection with criminal
proceedings, other than in respect of a crime alleged to have been
committed by the person,

unable to return because of war, industrial action, or social
or political unrest in which the customer is not willingly
participating,

Schedule 7 of the Bill proposes to insert a new 1218C and 1218D
into the SSA to allow the discretionary payment for more than 13
weeks where the person is receiving financial assistance under the
Medical Treatment Overseas Program provided for under the
National Health Act 1953.

The amendments to the SSA presented in Schedule 8 and the
amendments to the Veterans Entitlements Act 1986 (VEA)
presented in Schedule 9 have the same origins and purpose
concerning alterations to the treatment of income streams under the
income and assets tests. So the comments below refer to both
Schedules.

The fact that the provisions in Schedule 9 of the Bill amending
the VEA are the same as provisions in Schedule 8 amending the SSA
is because there are like income support payments provided under
both acts that have been kept in alignment. The Service Pension is
the main income support payment provided under the VEA and it is
almost identical to the Age Pension provided under the SSA in terms
of income and asset testing, effect of compensation and payment
rates. This close alignment ensures consistency and equity between
two payments that are paid for the same purpose; that is income
support for the retired age.(32) The only two
differences between the veterans Service Pension and the Age
Pension is the Service Pension is available five years earlier than
the Age Pension, recognising the extra stresses and strains of
veterans war service. Notwithstanding these two differences, in all
other respects the Service Pension and the Age Pension are
identical, reflecting the aim of ensuring consistency and equity
between like payments.

The income support payments provided under the VEA that have
their means testing arrangements (income and assets tests) aligned
with the income support payments provided under the SSA are the
Service Pension, the Partner Service Pension, the Invalidity
Service Pension and the Income Support Supplement. The like income
support payments provided under the SSA are the Age Pension, the
Disability Support Pension, the Widows Pension and the Parenting
Payment Single.

Since the early 1990s, allocated pensions and annuities (income
stream products) have become the most popular structured private
retirement income stream plans in the financial market. Billions of
dollars in superannuation funds (and other funds) have been rolled
into (or used to purchase) income stream funds. With this growth
there has also been a rapid increase in the numbers of self-managed
superannuation funds that are being designed to switch from
accumulating benefits to income streams. The advantages of income
stream products (depending on the product) are:

they can be designed to meet individual needs,

moneys can be pooled into a diverse range of managed
investments, responsive to market fluctuations and trends,

savings can be made to last longer,

money is not necessarily locked away and there is scope to make
capital withdrawals and taxed under superannuation lump-sum tax
rules (allocated pensions only),

there is capacity to vary income received,

there are tax advantages for income withdrawals if taken at a
steady pace where the income stream is superannuation funds based
and tax advantages (for example no capital gains tax) can be
realised, and

investment income earned but not distributed is not
taxable.

The income stream fund balance mainly reduces by the regular
income payments, any capital withdrawals and with ordinary fees and
charges.

An allocated pension is a superannuation account from which a
series of regular payments can be drawn upon in retirement. The
payments must lie between specified monetary limits set by factors
in the Superannuation Industry (Supervision) Regulations 1994. An
allocated pension can be turned into a lump-sum (that is, cashed
out or commuted) at any time and is assessed against the lump-sum
Reasonable Benefit Limit(33) only. Allocated pensions
are subject to the pensions assets test.

An annuity is a contract between a provider (usually a large
life insurance company or superannuation fund) and a person who
receives a regular series of specified payments, at specified
times, over a specified period in return for a large initial
premium. Depending on the date of purchase it is fully or partially
exempt as an asset for the pensions assets test.

Term allocated pensions have a similar account arrangement to an
allocated pension, but investors receive payments for a fixed
period based on their life expectancy. Other points include:

the pension s annual income payments are worked out on the
basis of the account balance at the start of the year (like an
allocated pension) by a set formula (unlike allocated pensions
where you can choose from a range of payment levels for a given
account balance),

there is no residual capital value at the end of the pension s
term (except in limited circumstances),

the pension cannot be commuted to a lump-sum (except in limited
circumstances) which means investors cannot access any of their
capital,

the pension is partially (50 per cent) exempt from the SSA and
VEA assets test, and

the pension is assessed under the more generous Reasonable
Benefit Limit.

In the 1997-98 Budget, the Government announced changes to the
pensions and benefits income and assets tests treatment of income
stream products.(34) The reforms were mainly in response
to the burgeoning use of income stream products by persons of
retired age and the increased diversity, design and complexity of
these products. The main concern was that some people were able to
organise substantial assets into mechanisms that circumvented the
income and assets testing arrangements. The other issue was to
provide some favourable treatment of income and assets testing
towards those investments that were long-term and genuinely
providing an income stream in retirement. The measures were
provided for in the Veterans' Affairs Legislation Amendment
(Further Budget 2000 and Other Measures) Act.
2002.(35)

Currently in the SSA and VEA, most investments are subject to
both the income and assets tests. However, there are special
concessional rules for income stream products.(36)
Arguably, it is in the best interests of both government to
encourage people to use their savings to obtain the best possible
retirement income, subject to the level of risk involved being
acceptable. The Government, in providing certain classes of
investments with concessional tax and/or income and assets test
treatment is encouraging their use, but the government is also
concerned with the adequacy of returns and the level of payments.
It is also concerned that the income stream lasts for an
appropriate period of time to justify the concessional treatment.
The government is also concerned that the products are not
primarily designed and constructed to avoid appropriate tax and/or
income support means testing arrangements.

Income stream products continue to be a very popular form of
investment for the retired aged. One of the features of this
popularity has been the increased incidence of self-managed income
streams. This feature poses new problems for decisions about
product classification and, flowing from this, the appropriate
income and assets test treatment under the SSA and the VEA. Where
an income stream is purchased commercially, the Australian
Prudential Regulatory Authority (APRA) rules need to be complied
with and as a result it is far more likely that the product will
run for its intended duration; that is for the remainder of the
investor's life or life expectancy at the time of purchase.

This security and surety about the product not changing to
justify its concessional assets test treatment may not apply in
relation to self-managed income stream products. These are products
where the purchaser of the income stream is also the trustee of the
product and with these products there is far more scope and freedom
for the purchaser/trustee to dissolve and re-organise the product
at any time. In such cases, the purchaser/trustee may have already
received the benefits of assets test exemption for some period, but
the product or products have not run for their originally intended
duration, and arguably, did not properly warrant such an asset test
concession at all. Further, where people wish to transfer some of
their savings, including their retirement savings, to others (for
example, members of their family), the policy is that this should
not be at the expense of other taxpayers as higher rates of social
security/veterans affairs pensions are provided as would otherwise
be the case.

As referred to in the Explanatory Memorandum,(37) the
government did announce changes to the requirements for small
non-arms length superannuation funds.(38) Arising from
concerns about the inflexibility of these 2004-05 changes, a
Department of Treasury review paper(39) recommended more
flexibility for the treatment of income streams. The amendments
presented in Schedules 8 and 9 of the Bill are to amend the SSA and
the VEA respectively to:

Extend the maximum allowable term over which life expectancy
and market-linked investments can be paid, and

To prescribe the amount of flexibility that will be allowed for
a one-off extra ordinary withdrawl from the standard regular
withdrawl amount prescribed in the investment. The variation
allowed will be plus or minus 10 per cent from the standard regular
withdrawal amount.

This amendment is mainly aimed at the use of large one-off
withdrawls from a self-managed income stream products to get around
the pensions income test rules for income stream products.

Currently, an allocated pension is required to provide the
recipient with a set annualised income otherwise it is not
recognised for the APRA or SSA and VEA rules. For the pension
income test this annualised income is regarded as income (less a
deduction based on purchase price) and counted over a year (for
example $1 200) to arrive at an annual rate of pension The annual
rate of pension derived is then divided by 26 to arrive at a
fortnightly rate of pension payment.

Under the current annual income and annual pension rate rules,
where for example a self-managed the trustee/recipient advises that
he/she wants to significantly increase the rate of annual payments
from their income stream product, a new annual rate of pension is
then calculated or even perhaps payment cancelled. For example, the
income stream annual income could be increased from $1 200 per year
to $20 000 per year. Then shortly afterwards a large one-off
withdrawl ($770 or $20 000 divide by 26) could be made. Then
immediately afterwards the trustee/recipient could advise that the
previous rate of payments ($1 200 per year) is returning and again
an annualised rate of pension would be recalculated. During the
short period that the $770 was withdrawn, pension may not have been
payable or significantly reduced but thereafter, after advising of
the return of the regular $1 200 per year payments the pension rate
is returned to the previous rate for the remainder of the year.
What has happened is a large amount of money has been received as a
one-off payment but this is not recognised in the annual rate of
pension for virtually the entire year.

To address this issue the amendments in Schedules 8 and 9
propose that withdrawals can only vary by plus or minus 10 per cent
from the regular set annualised income rate, for the income stream
to continue to receive the concessional income and asset test
treatment.

The amendments to the SSA in Schedule 8 Part 2
are to allow the splitting of an income stream between two former
partnered couples, if the splitting has been subject to an order
made by the Family Court under the Family Law Act 1975
(FLA). These amendments recognise that the FLA has been amended to
allow the splitting of income stream payments. The Family Law
Amendment (Annuities) Act 2004 was the legislation that made
these changes.(40)

Item 5 empowers the use of an indexed estimate
of income where a notice requesting an estimate has been issued and
not responded to by the claimant. Item 6 sets out
the procedure for actually calculating the indexed estimate.
Item 10 allows the setting of a FTB rate paid by
instalments using the indexed estimate. Item 13
does the same as Item 10 but for CCB. Item
14 sets out the process for calculating an indexed
estimate for CCB.

Item 1 removes from the FAA the provision that
prevented the recovery of CCB debts from a tax refund. Item
2 allows the recovery of a CCB debt from a tax refund so
long as it is a debt determined on or after 1 July 2006 and the tax
refund is determined on or after 1 July 2007.

Item 4 empowers the recall of unused allocated
child care places from a provider and the circumstances in which
this can be done. Item 5 inserts notification
requirements for information about allocated child care places on
service providers. Item 6 requires the Schedule 5
amendments to apply to allocated child care places whenever they
were allocated.

Item 1 amends the backdating provisions in the
SSA for CA caring for a child from 52 weeks to 12 weeks.
Item 2 amends the backdating provisions in the SSA
for CA caring for an adult from 26 weeks to 12 weeks.

Item 1 amends the FAA to allow the
discretionary extension of payment of FTB beyond 13 weeks while the
recipient is overseas where the person is receiving financial
assistance under the Medical Treatment Overseas Program provided
for under the National Health Act 1953.

Items 2, amends the SSA to allow the
discretionary extension of payment of various payments under the
SSA beyond 13 weeks while the recipient is overseas where the
person is receiving financial assistance under the Medical
Treatment Overseas Program provided for under the National
Health Act 1953.

Item 4 amends the SSA so that if the person has
gone overseas and they have less than two years residency in
Australia prior to departure, the normal restriction on
non-portability of payments within the first two years of residence
doesn t apply. This only applies where the person is receiving
financial assistance under the Medical Treatment Overseas Program
provided for under the National Health Act 1953.

Item 6 amends the SSA to apply to a person who
has previously been a resident in an Australian territory and not a
resident of Australia. Where this person has gone overseas and they
have less than two years residency in Australia prior to departure,
the normal restriction on non-portability of payments within the
first two years of residence doesn t apply. This only applies where
the person is receiving financial assistance under the Medical
Treatment Overseas Program provided for under the National
Health Act 1953.

Part 1 Amendments
commencing 1 January 2006

Items 2 to 7 extend the periods an income
stream life expectancy for a person can be accepted as applying by
up to 5 years over the number of years that would be normally set
up to the age of 100. Item 13 inserts into the SSA
the provisions to require that variations in the rate of regular
payments do not vary by more than plus or minus 10 per cent.

Item 14 details that amendments for extending
the life expectancy years applies to income streams purchased after
1 January 2006. It also prescribes that the amendments referring to
variations in regular payments refer to income stream payments
provided after 1 January 2006 regardless of when they were
purchased, so it has some retrospective elements in its effect.

Item 24 sets the life time expectance rules for
an income stream product jointly owned by two persons. This would
occur after a separation and the ownership split between now
separated partners. The life expectancy period will basically be
set at that which applies for the partner with the longest life
expectancy.

Items 2 to 7 extend the periods an income
stream life expectancy for a person can be accepted as applying by
up to 5 years over the number of years that would be normally set
up to the age of 100. Item 13 inserts into the VEA
the provisions to require that variations in the rate of regular
payments do not vary by plus or minus 10 per cent.

This Bill contains a very varied collection of amendments to
three different acts, the SSA, the FAA and the VEA. Generally the
proposed amendments will be seen as beneficial, especially Schedule
1 FTB-A income test free area, Schedule 2 indexing estimates of
adjusted taxable income, Schedule 5 - reducing allocation of child
care places and Schedule 7 portability and medical treatment
overseas program.

Some proposed amendments may not be seen as beneficial, namely
Schedule 6 carer allowance backdating provisions. The proposed
reduction of the backdating provisions for CA from 12 and 6 months
down to a universal 3 months is a significant change and not the
first time the government has attempted to make a change in this
area.

Schedules 8 and 9 income stream provisions are another chapter
in on-going changes to the treatment of income streams. This area
is both complex and the subject of regular changes to the SSA and
VEA rules, as the use and application of income stream products
change in the community. To a degree the rules in the SEA and the
VEA respond to the on-going variability in these products and their
use, very much like the tax rules play a catch-up game. The aim of
governments in the past has been to retain the integrity of the VEA
and the SSA to ensure what are essentially welfare payments are
targeted to those who are in the most need.

Matthew Toohey and Gillian Beer, Is it worth working now? The
financial impact of increased hours of work for mothers under
Australia's New Tax System , National Centre for Social and
Economic Modelling, Conference Paper CP 2003 022, December
2003, Canberra. http://www.natsem.canberra.edu.au/publication.jsp?titleID=CP0322

The
Secretary may extend the person's portability period for the
payment if the Secretary is satisfied that the person is unable to
return to
Australia because of any of the following events:

(a) a serious accident involving the person or a
family member of the person;

(b) a serious illness of the person or a family member of the
person;

(c) the hospitalisation of the person or a family member of the
person;

(d) the death of a family member of the person;

(e) the person's involvement in custody proceedings in the
country in which the person is located;

(f) a legal requirement for the person to remain outside
Australia in connection with criminal proceedings (other than
criminal proceedings in respect of a crime alleged to have been
committed by the person);

(g) robbery or serious crime committed against the person or a
family member of the person;

(h) a natural disaster in the country in which the person is
located;

(i) political or social unrest in the country in which the
person is located;

(b) if the event is political or social unrest, industrial
action or war-the person is not willingly involved in, or willingly
participating in the event.

There is no universal definition of the retired aged. Retired
aged generally refers to people of age pension age 65 for males and
currently 63 and for females. However it could include persons who
have reached their superannuation access age which is currently age
55.

Reasonable benefit limits (RBL) are the maximum amount of
retirement and termination of employment benefits that a person can
receive over their lifetime at concessional tax rates. The limits
include:

Lump-sum reasonable benefit limits, and

pension reasonable benefit limits.

Retirement and termination of employment benefits are:

eligible termination payments (ETPs)

superannuation pensions (including allocated pensions),
and

immediate annuities (including allocated annuities) that have
been purchased by rolling over superannuation money.

These benefits are paid when a person leaves employment, retires
or reaches a certain age.

For social security purposes an income stream purchased before
20 September 2004 is asset-test-exempt if the product meets the
following conditions:

it is payable for life or a term that is at least equal to a
person s life expectancy at the date of purchase, and

the payments are made at least annually, and

the payments may vary upwards in response to indexation, but
may only be varied downwards in response to allowable commutations,
and

the income stream s annual indexation is capped at the greater
of 5 per cent per annum, or CPI plus 1 per cent, and

there is no residual capital value, and

the income stream s purchase price is returned to the pensioner
over their life expectancy at the time of purchase, or the term of
the product, and

except in limited circumstances the income stream is
non-commutable, and

the income stream can ONLY be transferred to a reversionary
beneficiary on the death of the primary beneficiary, or another
reversionary beneficiary on the death of the first reversionary
beneficiary (or if there is no other reversionary beneficiary, to
their estates), and

the amount payable to the reversionary beneficiary cannot
exceed the amount paid to the primary beneficiary immediately
before their death, and

the income stream cannot be used as security for borrowing

For asset-test-exempt status, a life expectancy product must be
purchased at or after retirement age.

If an income stream is purchased after 20 September 2004, the
criteria by which lifetime complying pensions/annuities qualify for
a 50 per cent exemption under the assets test are the same as for
those purchased before 20 September, with the exception that the
guarantee period for pensions/annuities purchased after 20
September may be the lesser of the individual s life expectancy, or
20 years.

Peter Yeend
Social Policy Section
2 March 2006
Bills Digest Service
Information and Research Services

This paper has been prepared to support the work of the
Australian Parliament using information available at the time of
production. The views expressed do not reflect an official position
of the Information and Research Service, nor do they constitute
professional legal opinion.

IRS staff are available to discuss the paper's
contents with Senators and Members and their staff but not with
members of the public.

Except to the extent of the uses permitted under the
Copyright Act 1968, no part of this publication may be
reproduced or transmitted in any form or by any means, including
information storage and retrieval systems, without the prior
written consent of the Parliamentary Library, other than by members
of the Australian Parliament in the course of their official
duties.